Following the Trend

Although this book is intended for readers interested solely in systematic trend-following, “Following the Trend” should be read by all investors who are disappointed with prevailing low bond returns and justifiably wary of current volatility in equities.

Warren Buffet is reported to have said more than once, “Never invest in a business you cannot understand.” A suitably corollary is: “Never use investing methods you do not understand.”

Andreas Clenow’s book demonstrates carefully and convincingly that diversified systematic trend-following, over time, has yielded higher returns with lower risks than traditional stock investments. Because he explains what it is, how it works, why it works and who a few of the leading trend-followers are, reading this book carefully and putting the information it offers to work will, over time, very probably increase traditional investment portfolios’ returns significantly.

Meant for professional trend-followers or those who wish to become trend-followers, the book also offers investors who have ignored diversified systematic trend following very good reasons to consider it.

However, everyone should read the chapter “Year by year review,” covering 1990 through 2011, carefully. It is the most important chapter in the book. “Practicalities of futures trading” and “Final words of caution” are almost as important.

Another valuable lesson is the author’s discussions of risks when using systematic trend-following accompanied by the historical returns of some leading funds that use it.

He warns readers not to be concerned with opportunity losses. Well aware that it is the second mouse to the mousetrap that gets the cheese, systematic trend-followers do not buy at or near the bottom nor sell at or near the top.

Clenow also warns readers that there can be long periods of losses. However, through position sizing, timely stop-loss techniques, the widest possible asset diversification and faithful adherence to a proven system, he suggests diversified systematic trend-following has proven itself superior to virtually all other investment methods in mitigating risks.

Clenow’s explanation of average true range (ATR) as a volatility estimate and a tool for position sizing is very good. So is using ATR to set stop-losses. All three uses can be applied to reduce risks of any liquid investment.

Despite this praise, which is well deserved, the many useful charts and tables are very small. The Kindle e-book version does not seem to permit them to be enlarged. Most readers will need magnifying glasses.

The author’s wry humor appears occasionally. For example, at one point, he writes that crude oil is extracted in “…various regions of the world with horrible climates and extremist leaders, such as Saudi Arabia, Texas and Alaska.”

“Following the Trend” is an important book that should be read by professional systematic trend-followers, those who wish to become one and investors who want to understand how this higher-yield, lower-risk strategy can speed them on their way to wealth.

Desmond MacRae is a New York-based business writer specializing in banking, finance and investments. E-mail him at desmondmacrae@nyc.rr.com.